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Circular debt, royalty issue: Energy Policy – I

The new Energy Policy has been approved by the CCI (Council of Common Interest). We would like to examine and discuss the policy in a series of articles, taking up the issues one by one. In this first article of this series, we would focus on the NHP (Net Hydel Profit) or simply speaking royalty dues of KPK on hydel power. And in subsequent installments, we would take up the other issues, especially the decision to enhance electricity tariff rather steeply up to 70% albeit with one issue deferred, We have selected the NHP/royalty issue for discussion for the following reason. Under the new policy, Federal government wants to shift the load of electricity subsidies to the province. It has been proposed that the subsidy would be deducted/adjusted by the Federal Adjustor from the provincial revenue shares. WAPDA has been given one month to work out a feasible formula acceptable to the parties. In this formula setting, I speculate that the KPK government would raise the issue of NHP/royalty from hydel power generation.

As it is the formula setting would be quite difficult, for there could be three or four criteria; population, consumption and losses (theft and receivables). Population factor may be rejected on justifiable grounds especially by Punjab. In Punjab, the electricity theft is the least among all the provinces (however, Punjab leads in the theft of gas). Electricity theft in KPK is of the order of 35% including some technical losses may be of 5%. It is doubtful that KPK government would bear the burden itself. It may like to pass this on to the consumers. On top of it, Federal government would be raising the electricity tariff as mentioned earlier. The provincial government is controlled by not so amenable PTI, the main rival of government party in the current political scene. The only bargaining chip in the hands of the KPK government would be the issue of NHP.

The issue of NHO/hydro royalties is almost more than two decades old. There is a constitutional provision for paying NHP to KPK, The 1973 constitution uses the term Net hydel profit, however, it has not been easy to develop a consensus on how to calculate NHP. The late AGN Kazi developed a formula, which was contested by WAPDA and the GOP, and a Tribunal was formed, which also upheld AGN Kazi formula. The Tribunal gave an award in favour of KPK, asking WAPDA to pay arrears which the tribunal calculated as Rs 110 billion against a claim of Rs 595 billion submitted by the KPK government.

The amount should have swelled significantly due to the interest component of the award. The annual NHP dues are Rs 24 billion. WAPDA pays Rs 8 billion annually to KPK on account of NHP and does not recognise the tribunal’s award. GoP (in the initial euphoria of PM Yousuf Raza Gilani’s government in 2008) has assumed the liability of Rs 110 billion and some 30 Billion Rs have reportedly been paid on account of NHP arrears. But new arrears should have piled up. Now instead of paying their NHP dues, KPK government may respond, the Federal government is asking to pay on account of electricity. KPK consumes some 8 billion units of electricity. Its share in losses are roughly about 2.4 billion units which are valued around Rs 24 billion, an amount exactly equal to the annual NHP dues as determined by the Tribunal. KPK would lose the payments of Rs 8 billion that Wapda has been making annually.

The issue is quite contentious as Wapda is only prepared to pay what it has been paying. Moreover, the issue is further complicated because Wapda does not recognise Ghazi Barotha (run-of-the-river hydro power plant) to come under NHP, as according to its interpretation, the power plant is located in Punjab, which may be legalistically true, as the power plant is located in Punjab, and all other infrastructure and components are in KPK.

It is amazing that in these days of judicial activism, no body went to the Courts on Ghazi Barotha issue. It is an ideal ground for a legal battle. Federal government itself avoided going to the Supreme Court against the ruling of the tribunal. In a nutshell, the issue is far from settled. Although, those who wrote the 1973 Constitution, in their own right, defined the accounting formula for calculating the profit (NHP), the issue continues to be elusive. One can use the constitutional wordings to elucidate two or more diametrically opposing conclusions; one is that there is no profit that Wapda is making. It is under loss, so where does NHP stand; Thus no NHP due. On the other extreme, one can reject the existing hydel tariff of Rs 1.30 to be preposterously low and may demand a reference sales price equal to the Furnace oil based electricity of Rs 16-20 per unit or giving some concession may be prepared to agree to the average price of Rs 10 as a reference price for calculating the NHP. WAPDA expenses on Tarbela are hardly more than a rupee per unit. One can imagine the kind of money that can be demanded.

Therefore, one has to revisit the case. There is more data and more evidence has come forth from other countries. In Brazil, for example, there is a flat royalty rate system, of 6% of the sales price which is distributed in the ratio of 10:45:45% to the Federal, provincial and local governments respectively. In India, a federation like us, gives 12% free electricity to the producing province, along with a quota allocation of 25% for electricity supply to that province on payment of full tariff as determined by the regulatory commission. Besides, there is an option of provincial equity in the project. Thus Indians have simply eliminated the issue of determining sales price or profit by paying 12% free electricity. The producer province can sell that much electricity in the open market, if there is one, or resell to Wapda itself. It may choose to subsidise electricity in its controlled area or pay off the subsidy/theft apportionment or utilise the revenue in developmental activities or a mix of these all.

Although, there seems to be a lot of merit and simplicity in the Indian approach, and presumably there would be more practical and political acceptability, if the Indian formula is adopted as it is, we need not follow it literally. We can be creative. GOP should send a team of experts to study India’s royalty system and investigate its pros and cons from their counterparts who are managing the system. Beyond broad policy, there is always a fine print and difficulties are always in details. For example, instead of giving 12% free electricity, one may compute the amount that is to be paid. The reference sales price could be taken from the new Tariff determinations of hydro IPPs by Nepra. Suki Kinari and other projects have an average of Rs 5 per unit as selling price of electricity. This yields a royalty of Rs 0.60 per unit. If one takes the average cost as a reference sales price, it is Rs 10 per unit and the royalty comes out to be Rs 1.20 per unit. In fact, this is equivalent to the 12% free electricity formula.

There are three aspects to the problem of subsidies and the circular debt; T&D losses with theft and non-payments as a major component; Cost of generation; and the tariff. The new government has started with paying of the accumulated debt which is a step in the right direction. It would soon come back with a vengeance, if the corrective steps are not taken. Reliance on only tariff increase may be counterproductive and politically very damaging to the government which has come to the saddle only recently. Improvements have to take place in all directions. Many small steps cumulate to give a big result. Unfortunately, in energy sector, there aren’t many short-term options. It is all medium- to long-term cycle. Improvement (partially only) in governance can be brought about to yield some results in the short-run. Sceptics argue that social issues are the most difficult one to tackle, and is a long-term process. Governing Pakistan at this juncture of our national life is the most delicate, arduous and difficult task. It deserves all the sympathy and support that we can lend to them.

(To be continued tomorrow)

Akhtar Ali, "Circular debt, royalty issue: Energy Policy – I," Business recorder. 2013-08-07.
Keywords: Social sciences , Social issues , Social needs , Social crisis , Social problems , Social development , Social system , Power crisis , Energy policy , Electricity Ghazi Barotha , Pakistan